A few thoughts on the populist political environment in the US

Obama’s missed opportunity

In 2009 and beyond, the Obama Administration had a unique opportunity to not just recalibrate, but to replace the existing economic paradigm. They didn’t do that, largely because Obama and his closest policy advisors were establishment figures who supported the prevailing economic model.

We’re talking about people like Tim Geithner and Larry Summers. But there were many others, mostly drawn from the Washington establishment. Their goal was to right the ship and prevent an economic catastrophe by recapitalizing the banks and getting credit flowing again, adding fiscal stimulus only in the beginning as a jump start. With Obama, there was never going to be an overhaul like Roosevelt’s New Deal.

Obama was successful in all of this — much more successful than critics of his approach like me generally have admitted. Moreover, Obamacare was built along the same lines, a bolt-on to the existing healthcare system that didn’t fundamentally alter the way the healthcare industry worked. And it passed, though in a partisan vote. Now, the benefit of this approach is that it can garner buy-in from special interests, or, at a minimum, duck special interest opposition. However, the cost of Obama’s success was a return to a ‘normalcy’ that many in the American electorate no longer wanted.

As such, Obama’s tenure was a missed opportunity on many levels. He didn’t prosecute white collar criminals. And that means he didn’t hold banking industry executives to account for the financial crisis. He didn’t alter corporate incentives on the tax deductibility of debt or buybacks. And he didn’t increase regulatory and anti-trust scrutiny of big business. Obama’s reign was business as usual for corporate America. And that was very rewarding for both corporate insiders and equity and leveraged investors.

Trump has made things worse

When Donald Trump was elected, it was a clear sign that lingering disenchantment with the status quo had bubbled to the surface in the American electorate. And while the Democrats often describe his election as largely motivated by racial bigotry in the American electorate, I see his election more as a signpost of the groundswell of anti-establishment sentiment that has flourished everywhere in western advanced democracies.  So while you can point to local idiosyncrasies in each election that produced a populist outcome, the wave of populism across countries tells you a broad-based disenchantment has set in in the wake of the financial crisis. Trump’s election fits within that framing.

However, what we’ve seen from Trump as President, outside of his unorthodox communication and management style, is what one would expect from any Republican President. His focus on less regulation and lower taxes as the best way to ignite growth is well within the Republican mainstream. Meanwhile, from an economic standpoint, he has offered almost nothing to his blue collar, middle American voter base. He has only offered red meat on cultural issues, fueling the increased polarization of the American electorate.

So, when it comes to satisfaction with the status quo, Trump has made things even worse. We will see this more visibly as the 2020 election date draws closer. Moreover, if it weren’t for the dominance in the news cycle of the Mueller investigation and alleged Russian collusion, this lack of tangible economic benefit for middle class workers would be more of a liability for Trump than it has been. But, to the degree the economy slumps in 2019 and 2020, Trump will feel pain as his base of support erodes.

What I see regarding ‘corporate tax populism’

Political populism is flourishing everywhere right now. For example, CNN is reporting that Marco Rubio has taken on a populist mantle in going after stock buybacks. They write:

The backlash against stock buybacks has gone bipartisan.

Republican Senator Marco Rubio released a report on Tuesday that called for ending the tax advantages that share buybacks enjoy over dividends. The goal is to encourage companies to invest in the future rather than give them tax incentives to reward shareholders.

“We have too often failed to make the well-being of working Americans the terms for market success,” Rubio wrote in the report, which was released through the Senate Small Business Committee that he chairs.

Rubio’s pushback against buybacks comes as Democrats have slammed the spike in share repurchases sparked by the 2017 tax law. US companies announced more than $1 trillion of buybacks in 2018, the first full year since the tax law took effect, according to TrimTabs Investment Research.

While announced buybacks surged by 71% in 2018, government statistics show that business spending on job-creating investments like factories and equipment grew at a much more moderate pace. Fixed business investment increased just 8.2% through the first three quarters of 2018. Bank of America Merrill Lynch recently dubbed it the “investment boom that wasn’t.”

What I see regarding ‘anti-big-ness populism’

Axios is reporting the following:

In the fall of 2017, Amazon made itself a fêted hero to towns and cities across the United States, celebrated for promising to create 50,000 new jobs paying some $100,000 a year in a lucky place that would host the company’s second headquarters.

Today, though, Amazon may be forced to give up at least some of the $3 billion in concessions it was granted in November to create some 25,000 jobs in New York City — or build its HQ2 somewhere else.

Amazon is staring down a crisis of reputation: Its HQ2 search, launched in an era of public support verging on adulation, is now caught up in a very different epoch of popular unhappiness with the unchecked power of wealthy companies…

What’s happening: At a press conference Monday, New York Gov. Andrew Cuomo called HQ2 “the single greatest economic development transaction in the state’s history,” and said it would be wrong to stop the deal due to some political backlash.

• At the center of that pushback is state Sen. Michael Gianaris, a vocal opponent of HQ2. Gianaris, who has been nominated to a three-person state board that has veto power over the agreement, flatly says the deal ought to be killed.
• Gianaris’ nomination to the board is pending Cuomo’s signoff. But he tells me, even if the governor rejects him, it’ll be difficult to find widespread support for HQ2 in the state legislature.

The other side: Despite the very public and very loud opposition to Amazon, the public seems to generally approve of the deal. Per a new Siena College Research Institute poll, New Yorkers support HQ2 by a 20-point margin.

My take: Axios is off base here. The groundswell of opposition to things like HQ2 will increase over time. And the New York opinion poll cited by Axios isn’t the one that matters. What matters is what the local residents think. And I hear a lot of negative chatter about the impact on public transport in Long Island City, where Amazon’s HQ2 is to be placed.

In fact, Michael Gianaris is the representative in the New York State Senate for Queens, where Long Island City is located. He’s telling us that his constiuents want him to oppose this. And that’s what matters regarding public opinion. Cuomo overrides this at his peril.

What I see regarding ‘anti-inequality populism’

We know about the proposed tax on wealth and the increase in marginal tax rates being pushed by Elizabeth Warren and Alexandria Ocasio-Cortez respectively. I think the genesis of this is not envy of wealth, though I am sure there is some of that. It is the sense that a deregulated and decriminalized environment has made people wealthy through unfair means.

So when you read headlines that America’s 1% hasn’t had this much wealth since just before the Great Depression, that’s an allusion to the 1920s and the age of the Robber Barons. Implicitly, what’s being said is that the wealth of today’s super-wealthy is misbegotten in the same way the wealth of the Robber Barons was. And government, with its deregulation and decriminalization of white-collar crime, is complicit. That’s the mantra here.

Now, remember, this is allegedly the best of times. You constantly hear economists and pundits talk about the US being in full employment, for example. So, if this is as good as it gets, then imagine what kind of policy solutions will be on offer if the US economy hits the skids. Don’t believe the dismissal of these policy prescriptions as a ‘leftward’ turn of the Democrats toward ‘socialism’. Think of them as a natural outgrowth of festering disenchantment with the status quo commensurate with the litany of other initiatives and moves enumerated in this post above.

The reality is that the Republican Party is wedded to low taxes, low regulation and less government. So they can’t stake out this populist ground. That’s why the Democrats are doing so.

Trump is in real trouble here

Donald Trump, by all accounts, operates in the shadier side of business. This is a man with autocratic control over his company and a checkered financial history that made him a pariah to American banks. That made him turn to the former Soviet Republics and places like Saudi Arabia to drum up business. An, of course, Trump operates in the real estate business, an industry notorious for money laundering and financial chicanery to hide assets, cheat the tax man and clean dirty money. Plus, Trump has a long documented history of working with the Mafia.

This is why his personal business was his ‘red line’. I believe he has a lot to hide. And so, the campaign finance violations that snared Micheal Cohen are a big deal in this context. The cooperation of not just Cohen but also Trump Organization CFO Allen Weisselberg is like a Trojan horse, a beachhead for investigations into every nook and cranny of Trump’s shady business past. If there is any criminality there, Trump would have been involved since he is reputed to be a very ‘hands-on’ CEO. And I believe we will get tangible evidence of criminal wrongdoing at some point in 2019.

–Credit Writedowns 2019 Outlook, Part 1 – US Politics

The Democrats have cottoned on to what I wrote in January about the likelihood that Donald Trump engaged in illegal activities like money laundering at his company before becoming President. Again, I see this as very problematic for Donald Trump (and for Deutsche Bank too). Axios reported this morning:

 

Mueller is just the beginning. House Democrats plan a vast probe of President Trump and Russia — with a heavy focus on money laundering — that will include multiple committees and dramatic public hearings, and could last into 2020.

• The aggressive plans were outlined yesterday by a Democratic member of Congress at a roundtable for Washington reporters.
• The member said Congress plans interviews with new witnesses, and may go back to earlier witnesses who “stonewalled” under the Republican majority.

[…]
On Trump family finances, the member said the president is “not in a position to draw red lines.”

• “I am concerned that he may have drawn a red line that the Department of Justice may be observing.”
• “If we didn’t look at his business, … we wouldn’t know what we know now about his efforts to pursue what may have been the most lucrative deal of his life, the Trump Tower in Moscow — something the special counsel’s office has said stood to earn the family hundreds of millions of dollars.”
• “Now, most of his stuff isn’t building anymore: It’s licensing, and it doesn’t make that kind of money. So, this would have been huge.”
• “[T]he fact that the president says now: ‘Well, it’s not illegal and I might have lost the election. Why should I miss out, basically, on all that money?’ He may very well take the same position now: ‘I might not be re-elected, and so why shouldn’t I … still pursue it?”

One last comment on Russia

The US has often been and (likely will continue to be) a bad actor regarding interference in the democratic elections of other countries. The outrage in the US regarding Russia’s interference in the 2016 election owes much to the fact that the same tactics the US has used for years are being applied to the US itself – and successfully, I might add.

Social media makes this sort of manipulation easier. And I suspect other countries will be in the mix going forward, now that Russia has shown the way. Russia was definitely a bad actor here. But the media attention focussed on the Mueller investigation has been so disproportionate to the dollars Russia actually spent that the media have, in effect, discredited the investigation, aided and abetted, of course, by Trump’s distortion machine and his allies at Fox News.

Again, the outrage among Democrats that Hillary Clinton didn’t get elected, despite leading in the polls, has been amplified by the shock that the US is now as vulnerable to foreign political interference as any other country. In a sense, you could say the Internet has levelled the playing field; foreign interference is no longer the exclusive preserve of the likes of the CIA. Other actors can do it now too, both foreign and domestic, in the US and in any other advanced economy.

Expect lots of this in 2020 and beyond!

And let me make one last comment on this. Do you remember the 2015 doctored video of Greek Finance Minister Yanis Varoufakis? I do because I fell for the trick. See my post showing I fell for the con here. And see the admission that the video was doctored here.

This is what is coming in our electoral future – a lot more of it. Honestly, I don’t know how you stop this from eroding trust in our institutions and electoral systems because the technology is so good now. Sometimes you won’t know what is real and what is doctored. And that makes it a lot easier to simply stop thinking and follow your instincts, facts be damned.

That will be a kind of backdrop as the level of populism increases in this next round of elections.